In the following articles, we will examine how and why gold obtains its fundamental value, how it is used as a currency, and what factors subsequently influence its price in the market, from miners to speculators to central banks. We'll look at the basics of gold trading and what types of securities or instruments are commonly used to increase exposure to gold investments. We'll look at the use of gold as a long-term component of a diversified portfolio and as a short-term intraday trading asset. We'll look at the benefits of gold, but we'll also examine the risks and difficulties, and see if it lives up to the gold standard.
Investing in gold bars won't offer the leverage you would get when investing in gold mining stocks. Proponents of this rule argue that such a monetary system effectively controls credit expansion and imposes discipline on credit rules, since the amount of credit created is linked to a physical supply of gold. Given the above relationship, it is natural that investors concerned about the possibility that real returns will remain below zero or continue to fall in the near future are opting for gold today. Unlike other commodities, gold has historically achieved positive returns in low-inflation environments and during periods of deflationary crisis.
The main problem with gold is that, unlike other commodities such as oil or wheat, it is not exhausted or consumed. The fact that the precious metal tends to be traded like a bond and has many attributes similar to the types of bonds reinforces the argument that gold can be considered a defensive asset. Historically, gold has also shown price volatility similar to or even slightly higher than that of the stock market. Like no other product, gold has fascinated human societies since the beginning of recorded time.
Unlike most other commodities, the price of gold is determined by the derivatives market and not by the supply and demand of the metal itself. The increase in local demand is driven by self-directed investors, such as SMSF trustees, as well as by financial intermediaries seeking to allocate a portion of their client portfolios to gold. For every amount of gold in cash, you'll have that amount of cash flow going into your account every month indefinitely. In addition, you have this huge gaming casino, in which practically all transactions are settled in cash and no real gold changes hands.
However, some investors are still faced with the question of where gold fits in a portfolio. These central bank gold holds have been growing for more than a decade, indicating that gold is still considered an important monetary asset among these institutions.